How to be Prepared for an IRS Audit

What do you do when someone mentions the IRS? Do you panic and run? Or do you smile confidently, certain you are prepared should an audit occur? If you are like most people, the thought of a pending audit causes fear and panic. But the key to coming out on top is to prepare. Follow these tips to make sure your business is ready for an IRS audit.
Types of IRS Audits
Knowledge is power. Therefore, it is imperative to know the types of audits performed by the IRS and how they affect your business.
- Correspondence audits are by letter. In this type of audit, the IRS asks for verification, error correction, or additional documentation.
- Office audits request the taxpayer to come to an IRS office and to bring specific documents.
- Field audits are when the IRS comes to your place of business. This type of audit is more comprehensive, and the IRS can request any forms, documents, or previous years’ tax returns within certain limits.
Time limits on audits and collections
The IRS can conduct an audit of any business or personal tax return within three years of filing. They can collect back taxes owed for up to 10 years. For example, if a 2015 audit of a return filed in 2011 finds discrepancies in a return or returns filed between 2005 and 2015, it can collect taxes on all those returns.
Exceptions to the limits on audits and collections include tax evasion, filing a false return, or filing no return, in addition to other exceptions.
Preparing for a Tax Audit
Please note that it is always best to consult your tax professional before answering any letters you may receive from the IRS.
Keep your records organized. Penalties can be imposed on your business for poor records. Organize records by year and by type (income, expenses, pension plans, etc.). Make sure all relevant records are available. Keep bank or credit card records as well as relevant information from vendors. If records aren’t available, don’t make them up! Request them from the appropriate businesses.
Work to retrieve lost or destroyed records and document your efforts. If documents were destroyed during a disaster in your office, for example, record your attempts to reconstruct your business records, and show that you did backups of records.
Understand intentional vs. unintentional failures. If you can show that your issue (no records for a particular year, for example) was unintentional, the IRS tends to be more lenient. On the other hand, they are much quicker to impose fines and penalties for intentional actions or omissions.
Fireproof solutions are designed to help you manage your information. We can make sure you have an efficient document management system to alleviate the stress that comes during tax season or throughout the year. Contact us today to customize a solution that fits your business needs and ensures a successful IRS audit should one
